Speaking ahead of next week's spring meetings of the IMF and the World Bank, Lagarde said the policy moves taken in Europe had helped ease the strain and meant the Fund no longer needed quite so big a war chest to deal with the problems left behind by the financial crisis and recession.
"The steps taken by the Europeans in recent months are a timely reminder of the power of policy resolve and action," Lagarde said in a speech at the Brookings Institution in Washington. She urged European policymakers to "keep up and build on" their efforts, including through action in individual countries, support from the European Central Bank, repairing the banking system and fiscal integration. "The much-expected decision of euro area ministers to strengthen the European financial firewall has also been crucial," she said.
Lagarde's comments came as Italy was forced to pay sharply higher interest rates when it auctioned €5bn (£4.1bn) worth of bonds on Thursday, underlining anxiety in financial markets about the health of the eurozone's crisis-hit economies.
The Italian government, which is pushing through a series of unpopular economic reforms in a bid to kickstart growth, raised €4.88bn from investors, but was forced to pay an average yield of 3.92% for three-year loans, far higher than the previous auction last month.
Markets were rattled by the tricky sale, although bond yields fell in afternoon trading, amid rumours that the ECB may have resumed its emergency purchases of Spanish and Italian bonds in a bid to prevent borrowing costs reaching unsustainable levels.
With Spain still in the markets' sights too, prime minister Mariano Rajoy repeated his insistence that his country would not need financial aid. "Nobody is considering a bailout, it is on nobody's agenda,'' he told a press conference in Poland, where he was on an official visit.
He also said he had spoken with Italian premier Mario Monti, who had denied blaming Spain's travails for rocketing Italian bond yields. Meanwhile, unemployment in Greece rose to 21.8%, up from 12.5% two years ago.
The veteran speculator George Soros warned that Europe's "deflationary debt trap threatens to destroy a still incomplete political union".
In an FT article, Soros said the single currency had entered a "more lethal phase" and outlined a series of measures to solve the crisis – including an idea that all countries should be able to refinance their debt at the same interest rate.
Soros, known as the man who broke the Bank of England by betting that the UK would be forced to devalue the pound during the 1992 currency crisis, said that "far from abating, the euro crisis has recently taken a turn for the worse".
Soros, who is chairman of Soros Fund Management – which in 2011 stopped managing money for outside investors – warned that Europe was facing "a long period of economic stagnation or worse" whether or not the euro endures. He also warned that while countries in Latin America suffered a lost decade after their economic crisis in 1982, the European Union would not survive such an economic malaise.
